One Reason Why I Wouldn’t Buy ARM Holdings plc Today

Royston Wild explains why ARM Holdings plc (LON: ARM) is in danger of a significant share price downgrade.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am looking at why rising competition looks set to compromise ARM Holdings’ (LSE: ARM) (NASDAQ: ARMH.US) earnings forecasts.

Intel gathering pace inside key segments

Chip designers like ARM Holdings are having to face up to the reality slowing smartphone and tablet PC growth rates, with product saturation in key Western geographies prompting doubts over the extent of new product uptake in the coming years.

As well as having to contend with this significant demand shrinkage, the Cambridge-based firm is also battling against rising competition in these critical sectors. So reports in recent days that tech rival Intel (NASDAQ: INTC.US) ARM Holdingsis due to have its technology implanted in Samsung’s newest smartphone, slated for release later this year, will come as a major blow to the company if realised.

According to South Korean newspaper DDaily, the world’s biggest mobile phone manufacturer is set to launch its latest model using Intel’s impressive Moorefield processors, technology which packs impressive memory speeds, exceptional graphics capabilities and blistering application performance even when the battery is running low.

The American microchip manufacturer has long lagged its peers in the mobile device market, but the company’s Silvermont architecture formally announced in May last year appear to have finally launched Intel into the big leagues.

Indeed, these efforts culminated in the unveiling of the company’s Moorefield and Merrifield chips at the Mobile World Congress in February, technology which the firm feels confident will court huge interest from the likes of Samsung, Apple et al.

And Intel underlined its aggressive strategy to take on ARM Holdings and Qualcomm — which has long been Samsung’s go-to parts provider — in their own backyard by offering to sell its hardware at just $7 per chip, marginally above the cost of production.

Back in the tablet market, Intel is also looking to supercharge its exposure to this segment — particularly in the growth hotspot of China — and is seeking to place its components in more than 40 million devices in 2014, up from 10 million last year.

City analysts expect ARM Holdings to post earnings growth of 14% and 22% in 2014 and 2015 correspondingly, readings which result in bloated P/E multiples of 37.4 and 30.6.

These figures shoot considerably above the watermark of 15 which represents reasonable value, and like all entities dealing on lofty readouts, I believe that the business is in jeopardy of a severe price correction should its earnings prospects come under the spotlight.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in ARM Holdings and owns shares in Apple.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »